Fannie, Freddie Recover Much of Losses (Update)

The government-sponsored mortgage giants received a boost from calming comments from Treasury Secretary Henry Paulson and regulator James Lockhart, director of OFHEO.
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Updated from 12:03 p.m. EDT.

Shares of

Fannie Mae

(FNM)

and

Freddie Mac

(FRE)

surged Tuesday, after comments by Treasury Secretary Henry Paulson and the government-sponsored mortgage giants' top regulator eased fears about their capital position.

Fannie and Freddie shares each tumbled more than 16% on Monday, after a Lehman Brothers analyst on expressed concern that new accounting standards being considered by the Financial Accounting Standards Board could force them to raise billions of dollars in new capital.

The two stocks began to rise again on Tuesday, however, after James Lockhart, director of the Office of Federal Housing Enterprise Oversight, told reporters outside a meeting of a housing conference in Virginia that the new standards would not likely push the regulator to require the government-sponsored companies to raise more money. Lockhardt noted Fannie and Freddie have collectively raised more than $20 billion in the past several months, which they are using to win new business.

"I think it would be very strange for a regulator to let an accounting principal drive a capital decision," Lockhart said, according to

The Wall Street Journal

.

They Just Don't Get Fannie and Freddie!

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Paulson, in prepared remarks to the same conference, said Fannie and Freddie "have an important role to play" and noted that they "can be a constructive force in this period of stress in the housing market." He said the Bush administration's efforts to overhaul financial market regulation would help the companies "achieve their mission while operating safely and soundly."

"A strengthened regulator for Fannie and Freddie will increase investor confidence in these enterprises and will be a substantial tool to ease the housing downturn and increase the availability of affordable mortgages for Americans who want to buy a new home or refinance their current one," Paulson said.

Paulson also touted the use of covered bonds as one way to stimulate home buying. The bonds -- widely used in Europe to finance residential and commercial real estate, student loan and credit card debt - provide financing through a secured debt instrument collateralized by a pool of residential mortgage loans that remain on the issuer's balance sheet, Paulson said. Investors receive interest from the issuer's free cash flow.

Shares of Fannie, which had fallen more than 16% Monday, closed up 11.9% to $17.62. Freddie shares, which dipped nearly 18% Monday, ended the day 12% higher to $13.46.

OFHEO earlier this year cut Fannie's and Freddie's excess-capital requirement to 15% from 20%, with another cut to 10% in store later this year, due to the companies' efforts to raise capital and make other changes.

This article was written by a staff member of TheStreet.com.